No matter how young or old you are, losing your parents is heartbreaking. It’s the kind of traumatic life event when you’d most like to turn to your parents for comfort and advice, if only they were still with you.
Now, you’ve suddenly become the one that the family turns to, expecting you to guide them through the grief and the headaches of settling the estate: like the selling of your deceased parents’ house.
“Handling your parents’ estate after they pass away is a very difficult process,” explains Ryan McKee, a Los Angeles-based agent and probate specialist agent experienced in helping clients sell their parents’ houses.
“If the sale of the house needs to also be taken care of at that same time, it’s easy for details to get overlooked.”
When you sell a house you’ve inherited from your parents, you’ll have a long to-do list in front of you. However, you can reduce some of the stress if you simply work through the process step-by-step:
1: Establish the status of your parents’ estate
2: Identify the estate executor and notify all interested parties
3: Handle inheritance disagreements before they become full-blown disputes
4: Hire an agent experienced in selling inherited houses
5: Sort through your parents’ personal finances
6: Review the home’s insurance policy
7: Understand the tax implications of selling your parents’ house
8: Dispense your parents’ personal property
9: Prepare the house for sale
10: Set the list price and sell the house
Step 1: Establish the status of your parents’ estate
Most adult children know they’ll be inheriting their parents’ home one day, but too few understand exactly how the house will pass into their hands. You need to know the steps your parents took to give you ownership of the inherited property before you can even think about selling the house.
There are primarily three ways to inherit a house from your parents: through the probate process, by a transfer on death deed, or via a living trust.
Many families mistakenly believe inheriting property is as simple as listening to an official reading of their parents’ will. That may work in the movies, but in reality, real estate inherited via a will is usually subject to the long, complex probate process.
And if your parents didn’t leave a will, then probate is pretty much a given.
So, what is probate?
Probate is a court-supervised process that oversees the dispensation of your parents’ entire estate—including the sale of the house. This is done so that the proper people are granted the right to and responsibility for the estate, and so that your parents’ debts get paid as part of the process.
Depending on the laws in the state where your home is located, the courts may play a role in when and how the home is sold during probate. So be sure to do your probate research and enlist the help of a probate attorney.
Transfer on death deed
There is one way for the ownership of your deceased parents’ home to transfer to you as easily as it does in the movies: the transfer on death deed.
Also known as a beneficiary deed, this type of deed lets you inherit the property directly and immediately without the time, hassle and expense of probate.
With this type of deed in place, you can proceed with the sale of your parents’ home as soon as you’re ready.
However, this deed type is only valid in certain states. The laws governing these deeds vary from state to state, too.
For example, in some states, all you need is a completed transfer on death deed to avoid probate. In other states, your parents must also bequeath the property to you in their validated will, or the transfer on death deed is rendered meaningless.
Finally, while you can avoid probate with a transfer on death deed, you will still need to pay taxes on the house when you inherit it this way (more on this later).
It’s much simpler to sell your parents’ house if you’ve inherited it via a living trust.
A living trust is a document designed to streamline the management and inheritance of all of your parents’ assets—including the house. The document names your parents as the trustees (allowing them to manage all assets while they are still living), and you as the beneficiary.
If you inherit property where there’s a living trust in place, you can bypass probate, avoid some estate taxes, and it sets you up to sell the home immediately.
A trust is usually the best scenario when there are multiple heirs.
Step 2: Identify the estate executor and notify all interested parties
Just because you’re an heir to your parents’ estate, that doesn’t necessarily mean you’re a decision maker when it comes to selling the house.
“Many people only know that they’ve inherited a property, but they don’t have the information on how the inheritance process works,” says McKee.
“Before you can sell the house, you need to identify all of the heirs, and find out which one is the named executor or personal representative who is then authorized to make decisions about the home sale.”
The heirs aren’t the only parties interested in the dispensation of your parents’ estate. If they owed debts when they passed away, those creditors will need to be paid (see Step 5).
“It’s the responsibility of the personal representative to notify their deceased parents’ creditors, and pay those debts, often with some of the proceeds from the sale of the house,” explains McKee.
Typically, the estate attorney will already have this information. However, it makes sense to ask your real estate agent to run a title search, too. A title search may find invalid judgments that you’ll need to fight and have dismissed before selling the house.
A single decision maker is the best-case scenario when selling a house as part of the settlement of an estate with multiple heirs.
When all heirs have equal say in what happens to the house, it can result in years-long legal battles and costly attorneys’ fees.
Step 3: Handle inheritance disagreements before they become full-blown disputes
You’ll need to address potential points of conflict early to save yourself and your siblings’ time, money, and stress throughout the home sale process.
So sit down together and come to a decision on all of these details:
- Who’s responsible for preparing the house for sale
- Who’s funding the home sale expenses (and whether it will come from the estate)
- How you’ll split the proceeds
- How much the house is worth
- Who will give the go ahead to accept an offer
Your best bet is to list out every heir’s duties during the settlement of the estate and come to an agreement on a fair division of the proceeds—even if it’s not equal.
If you can’t come to an agreement, you may need to enlist the help of a professional mediator.
Step 4: Hire an agent experienced in selling inherited houses
One way to avoid inheritance disputes and the need for a professional mediator is by hiring a real estate agent that all of the heirs both like and trust. You also need to make sure that agent has probate or inherited property sales experience.
No matter the scenario you’re in—whether the house is in a trust or you’ll need to go through probate—” When you’re selling your parents’ house, you need an agent who’s actually completed a transaction along the same lines as your specific situation,” advises McKee.
The agent you hire also needs to reside in the same city where your deceased parents’ home is located.
An out-of-state agent won’t be licensed to sell real estate in your parents’ home state, and they won’t have access to the local MLS to pull accurate comps when pricing the house.
Step 5: Sort through your parents’ personal finances
Along with your parents’ house, you’re also inheriting any debt that property has, and all its bills, too. If you don’t keep on top of those finances, you’ll only complicate the home sale process.
“Figuring out the financials of the house needs to be dealt with early on,” advises McKee. “Your agent can help you find out if there’s an existing mortgage, who it’s being paid to, and how it’s being paid, such as a direct debit, or if your parents were paying it online or writing a check.”
Get access to the financial accounts you’ll need
Even if all of your parents’ bills will be paid automatically with a direct debit, you’ll still need to make sure there’s enough money in their account to cover those charges until the house sells.
To do that, you first need access to your parents’ bank accounts, which may take some work if you don’t already jointly own the account, or aren’t named as a payable-on-death beneficiary.
You’ll also need access to your parents’ monthly bills—especially those related to the maintenance of the house. So, you’ll need to arrange to have your parents’ mail forwarded to you, and find their login information for any online accounts.
Run a title search if necessary
Sometimes, a deceased parents’ home will have liens or judgments attached to the property, such as taxes that are in arrears, a home equity line of credit, or a reverse mortgage, and in that case you may need to run a full title search to identify and address those financial issues.
Submit the death certificate
You also need to notify the creditors of your parents’ death, and you may need to submit a copy of your parents’ death certificate(s) to these creditors, the credit bureaus, and the social security administration.
Here’s a basic list of accounts and bills to keep an eye out for when sorting through your parents’ financials:
- Income and retirement accounts (Checking savings accounts, 401K, CDs, etc.)
- Personal and property tax records
- Mortgage payment records
- Home Equity Line of Credit (HELOC)
- Reverse mortgage statements
- Utilities (water, electricity, sanitation, etc.)
- Medical bills
- Credit card statements
- Insurance policies
- Communication services (Landline, cell phone, internet service, cable TV, etc.)
- Household service expense records (Gardener, housekeeper, home healthcare, etc.)
- Homeowners association payment records
Once the house sells, you’ll be able to close out those accounts and stop paying those bills. Until then, you’ll need to keep making payments (although some services, like cable and internet, you can cancel right away).
Step 6: Review the home’s insurance policy
A vacant home is susceptible to vandals and people breaking into the property to steal things like appliances or the copper wiring. If your parents’ home is going to be vacant until it sells, then you may have to change the home insurance policy.
Since a vacant home has a higher risk of break-ins and vandalism, most insurance companies will not pay to cover this type of damage unless you have a vacant home insurance policy in place.
If, while sorting through your parents’ financials, you come across a home insurance policy that your parents were paying for directly, contact the company immediately to find out what you need to do to obtain a vacant home policy until the house sells.
Step 7: Understand the tax implications of selling your parents’ house
The government expects a chunk of any income you make, and that includes the proceeds from the sale of your deceased parents’ home.
“Potential tax implications include capital gains and estate taxes, which can be huge. So don’t try to figure this out on your own,” explains McKee.
“Your real estate agent can point you in the right direction on tax implications, however, an agent is not a tax professional. Always speak with your attorneys and also your tax professional to review any tax implications before selling your parents’ house.”
The good news is, you’ll also receive tax breaks that may reduce or eliminate any money owed.
Let’s take a look at the taxes that come into play when you’re selling inherited real estate:
Inheritance and estate taxes
Inheritance and estate taxes are two similar taxes on inherited property that differ in how they get paid and to who.
In essence, an estate tax is a federal tax against the total value of your parents’ estate, which must be assessed and paid before any remaining proceeds are distributed to the heirs.
An inheritance tax is a state tax that you (the beneficiary) pay to the state on the proceeds you inherit once your parents’ estate is settled.
The terms inheritance tax and estate tax are sometimes used interchangeably on the state level, depending upon the wording of your state’s laws. At this time, less than one-half of all states have either an inheritance or estate tax.
However, Maryland and New Jersey have both an estate and an inheritance tax at the state level.
Capital gains tax
Simply put, the capital gains tax applies to the dollar amount difference between the purchase price of a house and its final sold price.
By this definition, any money you make from the sale of your parents’ house after they die is technically taxable via the capital gains tax code.
Fortunately, there is a tax break or loophole known as step up in basis that can greatly reduce the amount that qualifies for the capital gains tax. The step up in basis sets the valuation of the inherited property at the date of death value, rather than your parents’
Original purchase price.
So, you’re only required to pay capital gains on any proceeds above the date of death value.
Consider this simplified example:
Let’s say the house your parents purchased for $80,000 decades ago is now worth $280,000. If your parents sold the home before they passed away, they would be required to pay capital gains on that $200,000. (Although, they would be eligible for the home sales tax exclusion.)
However, you’re inheriting the property at that $280,000 value—which means you’ll only need to pay capital gains on any proceeds above that inherited value amount. So, if you sell the home for $300,000, you’ll only need to pay capital gains on $20,000. If you sell it for $280,000 you won’t need to pay any capital gains tax.
And if you sell it at a loss, you’ll be eligible to apply a capital loss, assuming it was sold at fair market value in an arm’s length transaction (meaning you didn’t sell it to a relative at a discounted price).
Step 8: Dispense your parents’ personal property
Once you sort out the majority of the legal and financial issues, you’ll need to go through and dispose of the contents of your parents’ home before you can list the property for sale.
When you’re selling your own house, this process is known as decluttering. However, when you’re selling your deceased parents’ house, things get a tad more complex.
Distribute what’s owed to heirs
First off, you’ll need to find and dispense any personal property that your parents’ have bequeathed to other heirs.
So, if you’re the personal representative, you’re responsible for getting the 1940s china cabinet to your sister and your grandfather’s watch to your uncle, if that’s what the will says to do.
Note: the probate court may need to be involved in this process depending on your state laws. In fact, you may need to inventory all property for the courts before you can distribute anything.
If there is no named executor, or personal representative, it’s up to you and the other heirs to decide what happens to the contents of the house. This can get a bit tricky, especially if multiple heirs want the same item.
It that happens and you can’t reach a resolution, you may need to get a mediator involved to handle your parents’ personal property as well as the home sale decisions.
Clear out the rest of the house with an estate sale
Once you’ve dispensed the big ticket items and cherished possessions, you’ll likely still be left with a houseful of stuff. If yours is like most families, you’ll hit a wall where you just want to toss it all just to finish the job.
However, there is an alternative that might just net you a little extra cash: have an estate sale.
“Instead of throwing out items that none of the heirs want to keep, another option is an estate sale. Estate sale companies can orchestrate the sale of your parents’ unclaimed personal property so you can get a little money for those items,” explains McKee.
An estate sale or an auction may also be your best option to solve personal property disputes between bickering heirs. If an agreement cannot be reached over who gets what, simply put the item up for sale and let the best bid win.
Step 9: Prepare the house for sale
Once you’ve emptied the house, the inherited home sale works much like any other.
Complete basic home preparations
If no one has updated the kitchen and bathrooms since the 1980s or earlier, you may want to spend a little money on sprucing those areas up—but only if your goal is to get top dollar for the home.
Prepping to sell your parents’ house while you’re still mourning them may leave you with little energy to do much more than cleaning the place and maybe repainting the walls.
That may be all you need to do.
Or you can decide to sell “as is”
Selling your parents’ house as-is and getting a little less for the place isn’t necessarily a bad thing, especially if selling at or under the fair market value helps you avoid a hefty capital gains tax.
Plus, the disclosure rules are more lenient for inherited properties—this is because you were never the primary resident, so you have no first-hand knowledge of any issues it may have.
On the other hand, if you do know that your parents’ home has major issues that will be expensive to fix, and you don’t disclose them, you may be liable to cover those repair costs. Your liability all depends on how you inherited the property and if you sold it as the outright owner, or as the personal representative of your parents’ estate.
Consider a pre-listing inspection
If you’re not sure of the condition of your parents’ house, you may want to get a pre-listing inspection done. However, this is a risk you may not want to take, as you’ll likely have to disclose any problems uncovered during the inspection.
Getting your parents’ home ready to sell is that much harder if neither you, nor any of the other heirs, happen to live nearby. In that situation, it’s doubly important to hire a local real estate agent that you can trust to handle the long distance home sale.
Step 10: Set the list price, and sell the house
It’s not uncommon to have unrealistic expectations of the value of your parents’ home with sentimentality clouding everyone’s judgement, and grief putting everyone on an emotional rollercoaster.
You’ll need to let the market dictate the list price of your parents’ home, rather than personal opinion.
Get a CMA to take the emotion out of pricing
When you’re ready to list the house for sale, your agent will pull together a comparative market analysis (CMA) which estimates the fair market value of the house based on the prices of recently sold homes (comps).
However, the comps aren’t the only numbers that matter when you’re selling an inherited property.
Weigh your tax liability
When you’re selling your own home, getting top dollar is a top priority. But when you’re setting the list price for an inherited house, you need to consider the tax implications of any home sale proceeds.
You may wind up making more money in the long run if you sell at or just under the comps, if that helps you avoid paying capital gains tax.
Selling for a little less may also save you money, too—if it helps the house sell sooner rather than later.
Remember time is money
You’ll be shelling out money to cover the bills for the house every month you continue to own the home. The sooner you sell it the less you pay in operating costs. And you don’t want buyers to view a dark, unlit home because you forgot to pay the power company.
The clock is working against you so the faster you make decisions and the more realistic you can be about price and preparations, the better off you and your family will be during this stressful time.
While selling your deceased parents’ home is always a difficult step emotionally, the actual sale process of the house can be simplified by following these steps and with the help of experienced professionals.
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